This blog is intended to be a space to write about insurance, employee benefits, industry news and financial literacy. I promise I will be as impartial and direct as I can be, if I hold a conflict of interest or personal bias I will state it openly.

Monday, August 24, 2009

Commission

I get paid to sell a product, insurance. Just like every other merchant or retailer I earn money for every unit of product I sell. I really don’t see it any different than a buying an apple at a grocery store, I have something you want, you have to pay me for it. You are free to shop around and find the best value on apples or insurance policies, and if I do my job right you will buy from me.

I know a lot of people out there have a beef against commissioned sales people, stereotypes abound of the greasy sleazy pushy salesman. The door to door insurance salesman is also engrained in most people’s minds. While most stereotypes are based on reality, and there are those kinds of people in my industry and others, I certainly don’t consider myself one and most insurance advisors (notice how that sounds so much better than insurance agent) really are trying to do their best for their client. While you will have to take my word for it, I have never tried to up-sell or sell an un-needed product solely to boost my bottom line. I also have no qualms with what I get paid as I have a very extensive and specialized body of knowledge and experience and the services I provide and my time are valuable. Now with the moral hazard out of the way let’s get to the good stuff.

Group Insurance

Let’s start with group insurance as that is what I spend most of my time doing, and where I earn most of my money. I also think the group insurance commission methodology is a lot better than the individual products for reasons I will cover. Group insurance pays an annual commission, each year the group spends with an insurance company I get paid. Most small groups work on what is known as the Crown Scale, or something like it. The crown scale is a decreasing scale which pays less as the group gets larger.

Annual Premium

Commission

$0 - $10,000

10%

$10,000 - $25,000

7.5%

$25,000 - $50,000

5.0%

$50,000 - $100,000

3.0%

$100,000 - Thereafter

2.0%

The scales vary slightly but are all about the same. Some companies also pay a higher first year commission, typically 15% on the first $10,000 and the rest of the scale is the same.

Now on a group with say 3 employees, with an annual premium of $10,000 my compensation is $1,000 per year. It might take me three months, half a dozen meetings, a dozen quotes, and a hundred emails to prospect, quote, and sell a group. There is a lot of work that goes into setting up a group and I only get paid a measly grand. Of that I have to split it with the house so I walk away with $500. But I get it every year I keep the group. The small group market is tough, there is almost as much work to be done with a 3 life group as with a 30 life group. There are a lot more 3 life groups though so it becomes a numbers game.

Next let’s look at a bigger group, 120 members, $350,000 in annual premium.

Annual Premium

Commission %

Commission $

$0 - $10,000

10.0%

$1,000

$10,000 - $25,000

7.5%

$1,125

$25,000 - $50,000

5.0%

$1,250

$50,000 - $100,000

3.0%

$1,500

$100,000 - Thereafter

2.0%

$5,000

Avg. 2.82%

Total $9,875

I make a respectable 10 grand, and from the clients perspective they are getting a good value as my fee is less than 3%.

Depending on how much business I have with any one insurance company I can also receive a “Building Bonus”. I have almost no bonus with some companies and I have a really good bonus with others. My top group bonus is 40%, so on the large group I would get an extra $3,950 bringing my total compensation up to about $14,000. I don’t think much about the bonus, it is just something that happens over time, as you add new groups or you build up an asset base your bonus level grows. I haven’t actually looked at which companies pay a higher bonus or whose might be easier to achieve. I always place the group with the company that is the best fit for them; I try not to think about the commissions until after the cheque arrives.

In the large group market, there we can also work on a fee for service basis, we currently charge 4%. We offer fee for service but don’t use it much since we then have to add GST/PST/HST which we don’t have to charge if we receive a commission.

Individual Insurance

Individual insurance is a whole different ballgame. Payday comes only when you make a sale, and some sales make for big paydays. After a sale you receive a small trailer usually 1-3% which is supposed to keep you interested enough to provide service for the client after the sale. Because individual insurance provides a big commission and only minimal follow up pay less scrupulous agents will push for a large volume of sales. This is where insurance agents can get a bad reputation. If all the agent is concerned with is their paycheque, they will try and force you to buy a policy that you maybe don’t need or don’t understand. Once you buy you never hear from them again because your usefulness to them is done and they would rather not have to go on service calls that don’t pay anything.

The amount of commission we are paid depends on the type of policy we sell. The one constant is that the amount of commission is always based on the first year’s premium. Most if not all of your first years premium goes to the advisor.

Term 10 typically pays 40% of first year premium.

Term 20 typically pays 50-60% of first year premium. Since premiums and commission scale are higher there is a lot more money to be made selling Term 20 over Term 10. I almost always sell Term 10.

Universal Life, the big commission Kahuna. Universal Life is incredibly profitable for insurance companies so they pay a big commission for the agents to sell it. Universal life commissions are usually 70% of the first years commission, plus 3% of any deposits. The premiums are also a lot higher than term insurance so 70% of a lot of premium is a heck of a lot of commission.

Example: Male Age 40, Non-Smoker. $1,000,000 face amount

Commission Scale

First Years Premium

Compensation

Term 10

40%

$740.00

$296.00

Term 20

60%

$1350.00

$810.00

Universal Life

70%

$5435.16

$3804.61

Pretty big difference eh? It is easy to see how an agent can be swayed to pressure someone into buying a Term 20 over a Term 10, and selling that big UL is every agents dream. Now obviously someone looking for a cheap mortgage insurance policy isn’t going to buy a million of Universal Life, but it is pretty easy to see how they could be talked into a 20 year term. Same length as your mortgage, who knows what rates will be in 10 years, what if your health changes, think of the added security yadda yadda...

Bonuses also exist in the Individual market, I will only touch on them briefly as they vary so much from company to MGA to brokerage. The bonus is designed to be paid to the agency that employs the advisor. However, a lot of agents are independent or self employed, in which case they can keep the bonus. The bonus is dependent on how much business an agent writes with a company or MGA. The more business, the bigger the bonus. A bonus is based on the First Year Commission (FYC) rather than the premium. Bonuses range from zero to as high as 250% of FYC though the MGA usually takes about half of this amount. Most of my bonuses range between 100-160% of FYC. Essentially I get paid double if not closer to two and a half times base commission for certain policies. If I sold that UL policy above with a company that pays me a good bonus of 160% I would bank almost $10,000. While not common I know agents that have sold a Universal Life policy with a $50,000 per year premium and made their income from the year on the one policy.

A lot of you are probably thinking, that we get paid too much, and sometimes that is true, but all too often we don’t get paid enough. If I charged an hourly rate for the work I do for clients who never buy a policy I would probably be better off. I have done huge, ridiculous, tedious work for countless clients without ever seeing a dime.

As I started off saying, I like the group insurance commission method a lot more than the individual. There is too much pressure on a person to sell individual policies to get a paycheque. With the group market you don’t get paid as much but you get paid every year you keep the client, and to keep the client you have to communicate with them, solve their problems, go through the renewal process and actively be involved with the client. With a 20 year term policy you sell it once and then see you again in two decades, if the agent is even still in the business (there is a prolific dropout rate of new advisors). Another thing I like about the group market is that since I get paid every year from an existing group of clients I have a steady cash flow; I don’t have to be living paycheque to paycheque or policy to policy. Having a base of income is a huge benefit as it allows me to focus on the needs of my clients rather than my empty wallet. While I am still motivated to sell new policies it removes a level of desperation that can come at the end of a slow month with few sales.

There has been a small movement for the last 10 years or so to change how commissions are paid in the individual market. The push has been to implement a flat commission scale similar to the group market. If you sell a term 10 policy, you get 10% of your commission each year for 10 years. Each year you would need to sit down with the client and get them to sign off before you get paid. This would keep an advisor in constant communication with their clients, would weed out the agents just looking for a quick payday and would greatly improve the minimum level of service we provide. Sadly, there has been a lot more opposition to this movement than support. I think the day that regulations require us to show in big bold face type on the front of the policy what we get paid in dollars and cents the switch will happen. Until then don’t be afraid to ask what your advisor is getting paid. Their services may feel free since you never write them a cheque directly but you are indeed paying them out of your own pocket. Make sure you are getting what you paid for.

Thanks for the support Roger, I will check out Twitter. I will keep posting as long as people think its interesting. I know insurance isn't everyone's cup of tea but i hope some people might randomly stumble across by blog while Googleing for some information or advice.

I would appreciate it if anyone knows how to promote a blog and get more traffic, I am a pretty big nerd but this whole social networking this is a little beyond me.

After posting about commissions I did some digging to see how I might be go about setting up a "fee for service" insurance brokerage. What I found not only confused me but made me kind of mad.

In the insurance industry we are paid a commission to sell a policy. The company that sells the policy pays me, the advisor a commission. Nothing out of the ordinary there. As I mentioned previously, the Insurance Council of BC frowns on the act of reducing a commission to make a sale known as "rebating". Rebating is illegal in most provinces, BC is a little more relaxed and allows rebating up to 25% of commission, this includes gifts, reductions in premium, or just cutting a cheque to the client after the sale.

So if I am not allowed to reduce my commission, how can I waive the commission entirely and simply charge a fee. From what I found, and my interpretation could be wrong, I can't. The insurance companies and the insurance council will not let you waive commission on any policy other than one for a direct family member.

So I can charge a fee then sell a policy but I will still be paid a commission on that policy. Which means I could still be influenced by the commission in my recommendation, even though I am supposed to be impartial due to the fee.

The only way I can see around this conflict of interest is to charge a fee for a written plan, make specific recommendations as to what kind of policy a person needs then send them to someone else who will take the order and sell them that policy and that policy only. The other party will be paid a commission and I will be paid a fee, the client pays twice.

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Disclosure: The content of this page are provided as general information only and should not be taken as financial advice. All statements are believed to be correct at the time of publication, though errors can occur, please refer to a qualified professional before acting on anything posted here. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.E.O. & E.